Treasury Releases Final Rules for Digital Asset Reporting, But Leaves Unanswered Questions

Treasury and the IRS released final regulations on June 28, 2024, for the broker reporting requirements created by the Infrastructure Investment and Jobs Act (“IIJA”). These regulations address the rules for brokers to report gross proceeds for sales of digital assets made on or after January 1, 2025, and to report tax basis information for some digital assets sales made on or after January 1, 2026. 

Additional guidance detailing transition relief from reporting penalties and backup withholding as well as transitioning from a universal basis approach to a wallet-by-wallet or account-by-account basis allocation approach was also released. Although the final regulations address many questions, there are still some notable gaps awaiting further regulations. Treasury and the IRS indicated that these regulations will be forthcoming later this year, and announced a delay for reporting on six specific types of transactions until further guidance is released. 

Changes to Digital Asset Sale Reporting

The IIJA added the requirement for brokers to report sales of digital assets but provided little guidance on how to implement this new requirement. The IRS released proposed regulations on August 29, 2023, which outlined how it anticipated implementing the broker reporting requirements. Generally, the regulations adopted a broad definition of “broker” as any person who acts as an agent, principal, or middleman to “effectuate sales of digital assets.” The proposed regulations also defined “digital assets” and addressed fair market value, basis, and gain or loss determinations for digital assets; allocation of transaction costs; backup withholding requirements; and coordination rules to avoid duplicate reporting.

What Changes Were Made from the Proposed Regulations?

The final regulations contain many of the same provisions as the proposed regulations. However, there are some notable changes and clarifications in the final regulations. For instance, the proposed regulations would have required brokers to report tax basis and capital gain or loss information for digital assets acquired on or after January 1, 2023. The final regulations move that date back to January 1, 2026, in response to comments received.  

Other notable changes include:

1. A delay of implementation for non-custodial participants, such as decentralized finance (DeFi) platforms;
2. Adoption of a multiple broker rule to reduce the potential for information reporting duplication;
3. Addition of U.S. digital asset brokers to the list of exempt recipients, meaning that for sales effected for a U.S. digital asset broker, no information return is required;
4. Modification of transaction cost allocation to allocate costs to disposed digital assets when selling or disposing of digital assets in exchange for a materially different digital asset, with exceptions;
5. Adoption of de minimis annual reporting threshold of $10,000 for qualifying stablecoin sales, with the option to aggregate reporting above the threshold;
6. Adoption of de minimis annual reporting threshold of $600 for qualifying NFT sales, with the option to aggregate reporting above the threshold;
7. Addition of closed-loop assets to the list of excepted sales that are not subject to reporting (which also includes assets such as video game tokens);
8. Elimination of the requirement to report the time of the transaction, the transaction ID, and the wallet address (though brokers will be required to collect and retain the information for seven years); and
9. Limitations on the circumstances in which processors of digital asset payments (“PDAPs”) are treated as brokers; as well as adoption of a de minimis annual reporting threshold of $600.

The regulations also reserve sections for future rules relating to the Crypto-Asset Reporting Framework, as adopted by the Organization for Economic Cooperation and Development (“OECD”) in 2023. 

When Will Form 1099-DA Apply?

As previously mentioned, the regulations attempt to avoid or minimize the potential for duplicate reporting. The final regulations discuss when to report a sale of a dual classification asset as a sale of security or commodity (reportable on Form 1099-B) or the sale of a digital asset (reportable on Form 1099-DA). Generally, a sale of a dual classification asset should be reported on Form 1099-DA. However, the regulations identify the following three exceptions:

1. Sales of a dual classification asset that is a digital asset solely because the sale of such asset is cleared or settled on a limited-access regulated network (LARN);
2. All dual classification assets that are IRC Sec. 1256 contracts, and
3. Sales of tokenized interests in money market funds.

These sales will continue to be reported on Form 1099-B. 

Additionally, for real estate purchased with digital assets, a Form 1099-S for the seller and a Form 1099-DA for the buyer will need to be filed by real estate reporting persons. Finally, sales of a security or a digital asset in a widely held fixed investment trust (WHFIT), or the sale of an interest in a WHFIT, must be reported on Form 1099-DA unless the information is required to be reported under Treas. Reg. 1.671-5.

Sales of digital assets will be reported on Form 1099-DA once the form is finalized. Taxpayers who engage in sales of digital assets should expect to begin receiving their Forms 1099-DA after January 1, 2026, for transactions that occurred in 2025.

Transition Relief

In addition to the regulations, the IRS also released three other pieces of guidance regarding digital assets, providing an implementation delay for specific types of transactions, penalty relief for brokers who fail to meet the reporting requirements despite good faith efforts, and a safe harbor for taxpayers to reallocate unused basis. 

Information Reporting Delay for Certain Transactions

Notice 2024-57 (“the Notice”) provides a delay for brokers to file information returns and furnish payee statements for certain transactions identified in the Notice. The Notice also provides relief from any penalties under IRC Secs. 6721 and 6722 for failure to file information returns and furnish payee statements, respectively. The specific transactions that brokers will currently not have to report are:

1. Wrapping and Unwrapping Transactions
2. Liquidity Provider Transactions
3. Staking Transactions
4. Transactions Characterized as Lending of Digital Assets
5. Transactions Characterized as Short Sales of Digital Assets
6. Notional Principal Contract Transactions

Although brokers will not yet be required to report on these specific transactions, there may still be tax implications that need to be reported on the taxpayer’s tax return.

Notice 2024-56

Notice 2024-56 details penalty relief for brokers who fail to report digital assets sales or fail to furnish payee statements. The relief is available for information returns required to be filed and payee statements required to be furnished in 2026 for digital asset sales that take place in calendar year 2025. To qualify for relief, the broker must have made a good faith effort to meet the information return filing and payee statement furnishment requirements. Brokers will also be given relief from any liability for the payment of backup withholding tax required to be withheld in the following circumstances:

1. For any sale of a digital asset effected by a broker during calendar year 2025;
2. For any sale of a digital asset effected by a broker during calendar year 2026 for a customer if the broker submits that customer’s name and tax identification number (“TIN”) to the IRS’s TIN matching program and receives a response that the name and TIN matches the information in IRS records;
3. For any sale of a digital asset effected by a broker in return for specified NFTs,
4. For any digital asset for real property sale effected by a real estate reporting person, and
5. For certain sales of digital assets effected by PDAPs. 

Additionally, the notice advises on when a broker may treat another broker as a U.S. digital asset broker prior to the IRS releasing an updated Form W-9. A broker may rely on a written statement submitted with a Form W-9 or is separately signed under penalty of perjury from the second broker in such circumstances. Notice 2024-56 is effective for digital assets effected on or after January 1,2025.

Revenue Procedure 2024-28

Prior to the changes made by the IIJA, the IRS released and updated a Frequently Asked Questions section on their website related to digital assets and how taxpayers should apply existing tax principles to “virtual currency.” The IRS acknowledges in Rev. Proc. 2024-28 that under these FAQs, taxpayers may have believed they were permitted to specifically identify units or apply the first-in, first-out method of accounting to track basis using a universal approach. This means that taxpayers may have been tracking their cost basis for a particular coin across different wallets or accounts, instead of on wallet-by-wallet or account-by-account basis. 

The changes in the IIJA require brokers to report cost basis for digital asset sales made in 2026. Rev. Proc. 2024-28 permits taxpayers to allocate any unused basis to a wallet or account holding the same number of digital assets, so long as the allocation is “reasonable.” An allocation will be considered reasonable if it complies with the requirements under Sec. 5.02 of the Rev. Proc. Allocations may be specific to units or global. The Rev. Proc. does not specifically detail the process by which an allocation is to be made. Allocations must be made by January 1, 2025.  Rev. Proc. 2024-28 is effective June 28, 2024. 

The IRS has significantly increased its enforcement efforts surrounding digital assets over the past two years. These final regulations are another step in the agency’s efforts to increase voluntary reporting with digital assets. Taxpayers who have questions about this guidance and how it might affect them should reach out to a member of EisnerAmper’s Blockchain and Digital Assets team.